Part II: The Road from the European to the International Energy Charter

May 11, 2015 | 00:00

Part II: The Road from the European to the International Energy Charter
Transformation and adaptation to the changing energy world
“It is not the strongest of the species that survives, but rather, that which is most adaptable to change.” This statement, echoing one of the central arguments in social Darwinism (or Spencerism rather)...

Part II: The Road from the European to the International Energy Charter

Transformation and adaptation to the changing energy world

“It is not the strongest of the species that survives, but rather, that which is most adaptable to change.” This statement, echoing one of the central arguments in social Darwinism (or Spencerism rather) has proven to be increasingly valid in the energy world of the last two decades. Markets, industries and political strategies have been facing dramatic changes, driven by both short-term shocks and long-term transformations.

Energy Charter

Currently, we are observing how industries and policymakers adapt to the new reality: energy majors, for instance, have been under the spotlight announcing either large capex and exploration cuts, or fundamental re-structuring in their portfolios (such as the E.ON split) [note 1].

Hence, “standardization, simplification and industrialization” [note 2] increasingly becomes an industry’s mantra – something one could hardly imagine some ten years ago, when tailor-made solutions were dominating the sector with subsea development costs increasing up to 250% [note 3]. While energy efficiency and boosting renewable energy sources (RES) have risen on the political agenda, particularly in the EU, these sectors are also going through a transformation phase. The main challenges of the latter include integrating mature technologies in the system on market-based principles, working out an appropriate market design and ultimately bringing down the costs for consumers.

In this context, agreeing on basic standards and principles of cooperation beyond the legal borders of institutions like the EU (EU-MENA cooperation in clean power being particularly notable) is just as important as the internal adherence to its rules and agreements by the member-states.

In order to ensure security of supply in the coming decades, as well as the capacity to back up volatile RES generation where necessary, investment decisions have to be made today (bearing in mind the capital intensity inherent in conventional energy projects, long-term investment cycles and payback periods). This leads to the inextricable connection between security of supply, security of demand, as well as the transportation and transit of energy.

It is clear that in pursue of the latter, an international energy governance framework must do more than just serve the diverse geopolitical and strategic interests of the stakeholders across the energy sector. Such a framework would also have to offer some basic legally binding principles encouraging and promoting investments in the energy sector, while at the same time being technologically neutral.

In other words, in the same way international industries and policies are going through the process of adaptation to the new environment, a modern international organisation aiming to address the energy security concerns of governments, businesses and consumers (as well as the recently emerged prosumers), has to revise and update some of its principles to fit the changing paradigm of international energy cooperation and play a significant role in it.

This is one of the important elements driving the modernisation process of the Energy Charter. In order to understand its current position vis-à-vis other international organisations and incentives for modernisation, first of all, one has to look into its original formulation (the 1990s agreements) and trace the evolution of the Energy Charter Process.

The ECT was established after the break up of the Soviet Union, when the resource potential of the newly emerged countries was recognized by the West and reducing reliance on the Middle East was a crucial priority. However, billions of dollars of investments in the energy sector were required to keep and develop the production levels of fossil fuels in the post-Soviet space, while credit risks of transition economies in the region were extremely high.

Therefore, there was an acute need for a multilateral agreement that would facilitate the creation of a favourable investment climate, as well as provide investment protection mechanisms for foreign companies aiming to be active in the region.

The European Energy Charter and the Energy Charter Treaty

The Energy Charter Secretariat monitors the implementation of the 1994 Energy Charter Treaty and provides support to the Treaty-based international organisation, the Energy Charter Conference (52 states). The Treaty strengthens the rule of law on energy issues, by creating a level playing field of rules to be observed by all participating governments, thereby mitigating risks associated with energy-related investment and trade. The Treaty focuses on: the protection of foreign investments; non-discriminatory conditions for energy trade; reliable energy transit; the resolution of state-to-state and, in the case of investments, investor-state disputes; and energy efficiency policies.

The International Energy Charter is a political declaration to be adopted in The Hague on 20 May 2015. It is designed to spread fundamental principles of international energy cooperation to new partner countries.

This series of materials is part of a wider awareness-raising campaign aimed at promoting the renewed role and creating further momentum behind the Energy Charter in today’s global energy markets.

In 1991, during the Dutch Presidency of the European Council, Ruud Lubbers put forward his proposal for the creation of a pan-European energy initiative (the ‘Lubbers plan’) in the context of East-West and transatlantic cooperation. It would therefore provide the countries of the former Soviet Union with mechanisms to facilitate their transition to market economies.

Subsequently, the European Energy Charter – a political declaration of energy cooperation in wider Trans-Atlantic Europe – was signed in The Hague by 50 countries (by April 2015, 16 more countries joined) including the ones of Western Europe, the USA, Canada, Japan, and Australia. This marked the start of the Energy Charter Process.

The drafting of the legally binding documents followed in 1994, when the Energy Charter Treaty (ECT) and the Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA) were signed in Lisbon. Both entered into force in 1998.

The Treaty was designed to create a level playing field for consumers, producers and transit states, with developed as well as transition and developing economies, based on the practices of key international legal frameworks that were (being) established at the time, i.e. GATT/WTO, NAFTA, MAI (aborted in 1998) and the first EU energy Directives of 1996 and 1998 [note 4].

Having the legal force of more than 1200 BITs (Bilateral Investment Treaties) within the ECT member countries, the ECT has ever since become instrumental to facilitating a better investment climate and providing investment protection. It also has to be mentioned that the Energy Charter Treaty, being an international legal document, allowed a number of energy companies to protect themselves against the so-called ‘liberalisation risks’ that came about in Europe [note 5].

Looking back at the origins of the ECT, it is clear that its emergence was linked to an extraordinary window of opportunity that opened up due to a number of unprecedented geopolitical and market factors.

At present, one can hardly imagine the countries that formed its constituency back in the 1990s would come to establish energy cooperation and negotiate a mutually acceptable, legally binding agreement in the field of energy. Apart from that, the ECT has accumulated a number of good practices that it is ready to share and disseminate beyond its present constituency.

Therefore, with the developments of the on-going modernisation process, the ECT finds itself in a unique position to form the core of an emerging international energy architecture.

With the evolution of global energy markets and the international political climate, it became clear that a number of Treaty provisions, as well as the Energy Charter’s declaration, required updating. At the same time, it was acknowledged that some provisions of the Treaty have to be clarified further.

The evolution of the ECT

The Energy Charter Policy Review of 2004 established the mechanism of updating the Charter process on a five-year basis. The same year, the Industry Advisory Panel was set up by the Energy Charter Conference as a means to build on existing contacts with industry and to strengthen dialogue with the private sector along the main directions of the Charter Process, with a particular focus on risk mitigation and improvement of the business climate. Subsequently, the Strategy Group was established in 2007 to lead and facilitate its adaptation to the new dynamics in the energy sector [note 6].

After Russia’s withdrawal from the Provisional Application of the Treaty in 2009, an Ad Hoc Energy Charter Strategy Group started working on a Roadmap to tackle some ambiguities in Treaty provisions and ensure that the ECT is capable of addressing the new challenges emerging in its constituency (add to that the finalisation of the Transit Protocol, as well as the suggested new protocol on prevention of emergencies in transit).

In the case of Russia, the benefits of being actively involved in the modernisation process (as it was, until a certain point in time) are obvious, while alienating from it might lead to the replication of the WTO story [note 7], when a crucial international legal framework was developed without the active participation of the country (and it took 19 years until Russia joined that organisation).

The Warsaw Process and the International Energy Charter

The Road Map for Modernisation of the Energy Charter Process was adopted in 2010, and envisaged the establishment of an integrated policy on consolidation, expansion and outreach (CONEXO). The adoption of this policy paper was a significant step forward to expand the geographical scope of the Treaty. Simultaneously, this policy provided an instrument for ECT member states to prioritise countries to be approached and supported in moving towards ECT membership.

However, further efforts had to be made to open up the Charter to the new countries and move away from the Eurocentric approach that it used to have.

This understanding paved the way towards negotiations on and adoption of the updated version of the Energy Charter declaration. As the agreement to embark on this process was reached by the Conference in November 2012 in Warsaw, this event gave the name to the long-term modernisation process or the ‘Warsaw Process’.

The Warsaw Process could, in addition to eliminating the word European, incorporate into the updated Charter some new concepts or principles that did not stand out back in the 1990s.

This way, after 25 years of the Energy Charter Process, a comprehensive modernisation commenced. The last five years were dedicated to an intensive negotiation process to adapt the political declaration of the organisation, to work on the provisions of the Treaty, and to expand its scope and reach out to new members.

The Secretary General of the Energy Charter Secretariat, Amb Urban Rusnák, who took up this post on 1 January 2012 for 5 years, placed at the heart of his agenda 'ensuring that the Energy Charter Process, not only remains relevant given the changing global energy context, but is able to thrive in the altered setting.' As Amb Rusnák maintains, 'modernisation of the Energy Charter was initially mandated by our members at the Charter Conference in Rome in 2009 and we have been looking to build on this since I became Secretary General' [note 8].

The key initiative of the Secretary General was the creation of the International Energy Charter (IEC) - the updated version of the European Energy Charter of 1991 – which is a declaration of political intention aiming at strengthening energy cooperation between the signatory states and which does not bear any legally binding obligation or financial commitment. The IEC, which intends to promote the holistic vision of energy security and become the key element in international energy architecture (see Part I), will be formally adopted at the Ministerial Conference in The Hague on 20-21 May 2015 (‘The Hague II’).

Essentially, the signing of International Energy Charter will mark the end of the first modernisation phase of the Energy Charter, whereby a series of negotiations were held with the contacting parties of the ECT, as well as the countries beyond the Charter’s current constituency. Apart from that, consolidation efforts have been made to continue dialogue with the five non-ratifying countries: Australia, Belarus, Iceland, Norway, and Russia.

While the Energy Charter’s Industry Advisory Panel has been providing a link between energy industries and the governments of its member-states (e.g. it played a prominent role in facilitating the re-negotiation of RES support schemes in Portugal), this instrument has proved to be particularly attractive for the new members of the Charter.

2014 Chairmanship of the Republic of Kazakhstan and the Astana Declaration

Last year, the modernisation process was actively supported by the Republic of Kazakhstan, which was the first country in the history of the Energy Charter to hold the Chairmanship as a country/member instead of delegating this role to an individual representative.

A number of initiatives were put forward during this Chairmanship, including new dispute resolution mechanisms and the Astana Declaration of the Energy Charter Process. The latter paved the way towards the strategic orientation for the work of the subsidiary bodies of the Conference and the Secretariat towards 2019.

The two strategic objectives set by the Astana Declaration were 1) full implementation of the Energy Charter Treaty, that is 'taking full advantage of all the benefits of the Energy Charter Treaty and applying it in an optimal way' [note 9] and 2) global expansion of the Energy Charter Process, which 'means maximizing and capitalizing on both (i) the increasing interest of new countries in different regions of the world in the Energy Charter Process, and (ii) the renewed interest of signatories of the 1991 Energy Charter who have not yet ratified or acceded to the Energy Charter Treaty.'

Transforming the narrative and going beyond the traditional constituency

In addition, one has to consider that an important part of the Modernisation Phase I had to do with updating the language and content of the political declaration of 1991 by transforming the post-Cold War narrative of East-West cooperation to the contemporary energy reality (political, economic and technological), by stressing the four pillars of energy security of the 21st century and by putting forward the topics of sustainable development and energy poverty alleviation.

It is important to highlight that the IEC is not only open for signature (and adoption) by the contracting parties of the ECT (members and observers of the ECT), but also by all the new countries that are genuinely interested in becoming involved with the Energy Charter and believe in the principles enshrined in the newly negotiated text.

In fact, opening up the Energy Charter to new members and the negotiations over the International Energy Charter have already borne fruit, as a number of countries expressed their commitment to sign the declaration, while others have already done so.

Throughout the IEC negotiation process, it became clear that the declaration will have the capacity to mirror the fundamental priorities in diverse energy strategies of countries from Eurasia to Africa and Latin America.

Indeed, as the Charter has been becoming increasingly attractive to countries beyond its traditional constituency: Afghanistan has completed the accession process to the ECT in 2013, while ratification of the ECT in such countries as Jordan and Pakistan is progressing. The Charter is also working closely with Indonesia, Morocco and Serbia, while its relationship with China has received some new momentum.

‘One Belt, One Road’ and the IEC

The involvement in the IEC negotiations is indeed considered to be an important step towards international energy cooperation for China. According to country experts, the IEC has the potential to be instrumental for Beijing’s ‘One Belt, One Road’ initiative [note 10]. The Silk Road Economic Belt is envisaged as a network of oil and natural gas pipelines (as well as rail and roads) and other infrastructure projects, stretching from Xi’an in central China,

According to country experts, the IEC has the potential to be instrumental for Beijing’s ‘One Belt, One Road’ initiative

through Central Asia and reaching Moscow, Rotterdam, and Venice. Ensuring the security of investments overseas has therefore become crucial for the country, and stimulated its involvement in the Energy Charter Process. According to the experts, bilateral activities between China and the Energy Charter facilitated a better understanding of a strategic vision on both sides, and led to the identification of a number of shared priorities. Although it seems that there is a way to go before China would accede to the legally binding document – the Energy Charter Treaty - experts hope for greater involvement of China in the Charter Process. Certainly, it would be a crucial step forward if China would sign the International Energy Charter at the upcoming Ministerial Conference in the Hague.

Improving the investment climate in the Sahel Region

In the case of Nigeria and Mauritania, the role of the Energy Charter for the economic development and improvement of the investment climate in the energy sector is considered to be pivotal. Moreover, on April 22, Chad and Niger signed the International Energy Charter and committed to acceding to the Energy Charter Treaty.

As the expert from Nigeria, J.D. Uwakwe Ukuta Azikiwe, maintains, 'the modernisation process is beneficial for countries like Nigeria as it provides us with the opportunity to get long-lasting solutions for our energy problems, by helping to attract investors to the country using a single ‘investment’ treaty, instead of several bi-lateral investment treaties with member states.'

the modernisation process is beneficial for countries like Nigeria

Moreover, he claims that 'the benefits of being part of the Energy Charter include strengthening our rule of law, the rebuilding of our national image, the reduction of political risks, the promotion of non-discrimination among investors, the promotion of transparency in our processes, and having a predictable dispute resolution mechanism. These changes are already being put in place in Nigeria to create an environment that will attract foreign investments to the country. These are needed for the provision of infrastructure, increase in access to energy and alleviation of poverty, reduction of the pollution caused by gas flaring, and to boost the economy of the country.'

According to Mr Khroumbaly Lehbib, in the case of Mauritania, Economic Advisor for SMHPM the National Oil Company of Mauritania, the country 'considers accession to the ECT as a major improvement for the harmonisation of the legal framework [of Mauritania] with international standards especially in the energy sector, one of the main growth levers of national economy.' As Mr Lehbib develops, 'in the last decade, the government of the country has set as priority the eradication of poverty through sustainable development which takes in consideration national resources; in addition, the country is open to regional and international integration. The process of modernisation of the legal framework of economic activities was one the focus points. These efforts have improved the growth of the economy steadily, by attracting FDIs (foreign direct investments) and encouraging the country to take more steps in this direction. Mauritania’s gas and oil resources together with its mining sector, which is one of fastest growing in West Africa, could allow Mauritania to become a regional player in the energy sector.'

Indeed, the country has a number of ambitious plans and projects such as increasing export of power generation from gas to the sub-region. However, 'all these plans of accelerating economic development, achieving sustainable and affordable energy access for Mauritanians and for exports will need a friendly environment for investment, open markets, regional integration and international cooperation.' As Mr Lehbib states 'we believe that accession to the ECT will open more possibilities to attract FDIs for the country, to integrate more into international energy markets and provide more possibilities for international cooperation especially in energy efficiency, environment protection and transfer of technology.'

Once the Modernisation Phase I is completed, what to expect from Phase II?

In view of the upcoming Ministerial Conference in the Hague, a spokesperson of the Ministry of Economic Affairs explains why the Netherlands is hosting the special Ministerial Conference:

'The Netherlands has played an active role in the modernisation process of the Energy Charter, as one would expect from a founding father and depository state of the ’91 European Energy Charter. When the current SG of the Energy Charter Secretariat Urban Rusnák took up office a few years ago, we backed his plan to modernise this old Charter, a political declaration of intent, as to make it more accessible to new countries which will in the end hopefully also lead to new countries entering the Energy Charter Treaty. That is why The Netherlands offered to host the special Ministerial Conference to adopt and sign this new Charter, which is now named the International Energy Charter.'

On the key strengths of this political declaration (the IEC) the Spokesperson added:

'The new Charter transcends the former Eurasian context. By including newcomers, the new Charter now has a presence on five ‘continents’ (Europe, Asia, the Americas, Africa and Oceania). Countries that sign the Charter express their commitment to work together and engage in dialogue in the field of energy on the basis of common principles and overcoming economic divisions that might exist.

In order to get these new countries to join, the outdated text which withheld some countries to enter the Charter, has been stripped. The Charter keeps the key principles that were seen as important in ’91 and which did not loose any importance since then: efficient functioning of energy markets, investment protection, free transit of energy resources, promoting trade in energy and energy-related goods and cooperation in energy policy development, including energy efficiency and environmental protection. We welcome the new elements addressing today’s energy challenges, like the importance of access to energy and the importance of renewable energy. The text of the International Energy Charter will also in a balanced manner do justice to the importance of energy security for producing, consuming and energy transit countries.'

On the eve of The Hague II, when nearly half of the UN member countries will agree to re-define international energy security, one cannot help but wonder how long it would take to update the legal framework for this cooperation – the Energy Charter Treaty.

The IEC will be bound to play a crucial role in global energy architecture. At the same time, using the legal framework offered by the existing Energy Charter Treaty in the potential new member states would clearly be an integral part of strengthening energy security and addressing a number of contemporary industry challenges.

The next article will be dedicated to the issue of enhancing predictability of the investment climate in the energy industry and the role of the Energy Charter.

Acknowledgements

We would like to thank all the experts whom we have consulted in the course of writing this article for providing their valuable comments and meeting the impossible deadlines.

Daria Nochevnik is a EU Energy Regulatory and Strategic Political Analysis Specialist and Deputy Head of the Greek Energy Forum in Brussels. The opinions expressed in the article are personal and do not reflect the views of the entire Forum or the companies that employ the author.

Notes

The E.ON split into two companies: E.ON will be dealing with RES, distribution and Consumer Solutions, while a spin off company will take over Upstream, Commodities and Power Generation.

The Energy Charter Treaty's trade provisions, which were initially based on the trading regime of the GATT, were modified by the adoption in April 1998 of a Trade Amendment to the Treaty. This brought the Treaty's trade provisions into line with the rules and practices of the World Trade Organisation. The Trade Amendment entered into force on 21 January 2010 – see www.encharter.org/index.php?id=608

Detailed analysis of the economic and legal features of the ECT is provided by a number of articles of Konoplyanik, A., including:‘International mechanisms of investment protection of foreign investment in energy and expanded & updated package of the ECT and related documents’, ‘Neft, gaz I pravo’ Journal (‘Oil, gas and law’), April 2014, pp.51-53 Konoplyanik and Waelde, Energy Charter Treaty and its Role in International Energy, Journal of Energy and Natural Resources Law, November 2006, vol. 24, No 4, p. 523-558 Konoplyanik and Waelde (ed.). European Energy Charter Treaty: An East-West Gateway for Investment & Trade. (International Energy and Resources Law & Policy Series). London - The Hague - Boston: Kluwer Law International, 1996

Konoplyanik A., Energy Charter Plus - Russia to Take the Lead Role in Modernizing ECT? OGEL, August 2009

Konoplyanik A. International mechanisms of investment protection of foreign investment in energy and expanded & updated package of the ECT and related documents, ‘Neft, gaz I pravo’ Journal (‘Oil, gas and law’), April 2014, pp.51-53